Weekly Commodity Update

by: Hans van Cleef , Casper Burgering

Commodities hit by policy adjustments

Worries about changes to US monetary policy hurt the overall sentiment in commodities. As a result, most commodity prices dropped. The USD appreciation and the stronger than expected US consumer confidence were not helpful either. Only the Baltic Dry index, Iron ore and sugar traded higher compared to last week. Looking ahead, the market is closely watching the release of the USDA mid-year report (Friday) which could lead to increased volatility.

Changing policies pressure commodities

During the previous days, many commodity prices fell under pressure after the Fed indicated that it will be appropriate to moderate the pace of asset purchases ‘later this year’. Bernanke stressed though that a reduction in the asset purchases would not automatically lead to an imminent termination of the programmes. Instead, the Fed was likely to continue to reduce its programmes with ‘measured steps’ through the first half of next year, with the programmes eventually being completely unwound around the middle of next year. The Chinese central bank during the recent stress episode in liquidity markets, at least initially, showed some reluctance in supporting the banks. But this was short-lived as the central bank a few days later appeared to change its mind and indicated that it was willing to support any bank that had temporary funding shortages. The changing policies the US resulted in increased pressure on the whole commodity complex. In fact, unwinding stimulus programmes due to improved economic growth which result in higher yields and a stronger USD could keep the lid on commodity prices for a longer period of time.

Copper price has taken a beating

The copper price continued its way downward during last week and lost again 2%. Copper prices dropped steeply since the 4th of June, as stakeholder sentiment cooled significantly and worries increased on copper demand. 

Copper LME price and stocksCopper price lost 9% in only two weeks. The fall was triggered by the announcement of the Fed on disappointing Chinese manufacturing data and tight monetary conditions in China had their fair share. Stocks at LME warehouses have also increased by 4% during last week, while stocks in Shanghai gained 3%. In our view, copper fundamentals are still sound, with relative low stocks (which still represent only 1-2 weeks of consumption) and a balanced supply and demand situation. The current deterioration is the result of weak sentiment amongst stakeholders, a long series of disappointing data and announcements, on which many investors panicked.

Precious metals under pressure

The divergence between precious metals has come to an end. Although other precious metals already reflected the global economic soft path, palladium prices ignored this soft patch up to 13 June. Since then palladium prices have caught up with other precious metals by dropping almost 10%. Our end of June forecast of 675 USD/ounce was touched on 20 June. Silver also hit our end of June forecast on this day. Gold dropped below our aggressive year-end target of 1,300 USD/ounce. commentReason for these dramatic moves was a change in outlook on the Fed.Ahead of the FOMC decision, precious metals edged higher as the US dollar was under pressure. The first reaction was one of a higher gold price as the FOMC statement made no mention of a reduction of the Fed’s bond purchases. But the upward revisions to the Fed’s growth forecasts in 2014 and prospects of a lower unemployment rate in 2013 and 2014 sent US yields and the US dollar higher. This combination proved in an environment of US growth not improving yet and weak Chinese PMI proved to be disastrous for precious metals. Although expectations of the tapering are mostly priced in, the prospect of higher US yields, a stronger US dollar and a stronger US economy are not supportive for gold prices in the future.

Going forward

This Friday (28 June), the US Department of Agriculturals (USDA) will release its mid-year report on acreage and stocks. According to Reuters, June reports in 2009, 2010 and 2011 produced the largest moves in corn futures for those years. Last week, soft commodities were already under heavy pressure due to the Fed comments. Anticipating on possible new large moves, traders close their books or at least reduce their open positions.

Also on Friday, we will release our new Energy Monitor July called “Energy Market Surpluses”. In this report, we will highlight the recent developments in the oil and gas market. Other topics which will be covered are the oversupply as a result of tight oil, the gas price differentials between Europa and the US which will narrow in the coming years, and the new European Carbon emission rescue plan.